ISDN Holding's FY2023 numbers came in below his expectations but William Tng of CGS International, citing better demand seen this year and next, has upgraded his call on this counter from "reduce" to "hold".
For 2HFY2023 ended Dec 2023, ISDN's revenue dropped 7.8% y-o-y to $341.8 million, bringing full-year revenue to $341.8 million, down 7.8% over FY2022.
Earnings for 2HFY2023 dropped 89.5% y-o-y to $372,000, resulting in a full-year bottom line of $4.95 million, down 66.1% over the preceding year.
According to ISDN, its FY2023 numbers were weighed down by unfavourable forex and also impairment losses on financial assets. The industry-wide slowdown in semiconductors hurt the company as well.
ISDN generates around three-quarters of its FY2023 revenue from its China industrial automation revenue segment, which was up 6.6% yoy when booked in RMB but down 2.4% y-o-y in Singdollar, the reporting currency.
ISDN’s Southeast Asia industrial automation business, which generated 21% of its FY2023 top line, was significantly impacted by the slowdown suffered by the semiconductor industry in 2HFY23. For the whole of FY2023, revenue from this segment was down 28.3% y-o-y.
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"As ISDN holds the view that demand in both its China market and the semicon industry in Southeast Asia would recover over FY2024 to FY2026, it did not aggressively reduce its cost structure in the face of weaker revenue," writes Tng in his March 18 note.
Tng observes that ISDN is cautiously optimistic about the current FY2024.
China's Manufacturing Purchasing Managers’ Index (PMI), a key indicator of manufacturing activity, crossed into expansionary territory in December 2023 and January 2024.
In addition, in its Nov 28 2023 forecast, World Semiconductor Trade Statistics (WSTS) projects global semicon sales to grow 13.1% this year.
"Management believes that a slowing cyclical headwind, continued demand for industrial automation in Asia, and the growth of ISDN’s strategic capabilities, positions the group well to capitalise on cyclical recovery and long-term growth in industrial automation," writes Tng.
While he trimmed his gross profit margin assumptions, Tng is valuing ISDN at its 10-year average P/E of 11.0x, up from 9.5x previously, on better demand conditions that could lead to earnings upside for FY2024 and the coming FY2025.
His new target price is 32 cents target price from 36 cents previously, versus ISDN's closing price of 30 cents on March 18.
For Tng, upside risks include higher-than-expected earnings contribution from its hydropower business segment and a faster pace of economic growth as China tries to re-stimulate its economy.
Downside risks, on the other hand, include weak customer demand if the global economy continues to slow and the possibility of bad debts as economic conditions worsen.
